Decision Tree for Decision Making Essay Example

Introduction

For the business management, managers often face tough decisions that require critical decision making. Developing a decision tree to differentiate the choices can result in thorough discussion and eventually assist in arriving at a precise decision. The management of chemical industry is held in a dilemma of deciding whether to establish a small plant or a large one that manufactures a new product. The product to be produced is expected to have a market life of ten years, and therefore the decision depends on what size the market for the outcome will be. The demand for the product can have high demand during the initial years but when the product does not meet the customer expectations will decline. If the company establishes a large plant, it must work with it despite the size of the market. Building a small plant implies the management has an alternative of expanding the plant in two years when the demand is high in the starting period. The management is uncertain on what decisions to give priority and the following decisions tree will act as guidance towards diligent decision making for the company.

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The decision tree demonstrates the issues and uncertainties that the business management must address to make proper investment decisions. The decision tree has numerous benefits as a tool for effective decision making by individuals in the company. The decision tree shows the management of some of the possible risks, objectives, monetary gains and information in the investment issue. The decision tree for the management issue in the chemical company is characterized by a problem in the management (Haynes, 2015). The initial step in the construction of the tree is an initial decision which should be on the left. Following the initial decision stage is the second stage of decision making located at a point A, and it is possible only if the development of the project is successful. With an assumption that there is no significant change in the situation between the initial point of decision making and the time at point A, the management can now decide on what alternatives will be essential to them at the time. At the right of the tree are the results of the different approaches of decisions and events. The outcomes depend on the current information of the company, and the management can tell what they have from what is to happen. At this stage, you cannot identify all the events that can occur and it is important to take it under analysis. In the decision tree, only the decisions, activities and results that are major to the company and have an influence on the matters the management need to consider are addressed.

Decision making using the decision tree

Decision 1

The company is compelled to decide between small and large plant, and a decision must be provided immediately (Thomas & Chartered Institute of Marketing, 2012). If in any case the company chooses to establish a small plant and realizes that the demand is high in the earlier periods it can meet the targets in two years.

Decision 2

The company must resolve to expand, but at the same time, it can decide to go beyond the clear outlines of alternatives. In the process of decision making the management and all other executives must consider cost and returns which might occur frequently. The estimates of the income to be obtained yearly can be made under certain assumptions for every alternative. A large plant with a marketing estimate of 60% chances in the long run and a 40% chance of low demand can produce one million dollars annually in cash flow (Moore, 2010). At the same time, a big plant with a low yield volume can only generate one hundred thousand dollars since it experiences high costs and inefficiencies which are fixed. A small plant with relatively low demand is economical and can make four hundred thousand dollars of cash income in a year. When the above data is used in the tree diagram, then the following representation of a decision tree can be constructed. The decision tree has shown the knowledge that the management has on the company which can assist in an analysis that is more dynamic and systematic and can result in excellent decisions. The management can now use the events in the decision tree to make conclusions.

The management in trying to bring together the requirements, the management must identify at comprehensive points of decision and other options present at every point of the decision tree. The management must also spot the points creating uncertainty and the mode of optional results and the ultimate outcome (Junkui & Jaafari, 2003). The management is also compelled to approximate the values which are needed to make the analysis most importantly the chances of various events and the results of actions. Eventually, to choose a direction of diligent decision making, the chemical company must analyse the alternatives present at every stage of decision making.

Choosing the course of action

At this point, we can now focus on the subsequent step of the analysis. The level compares the consequences of different courses of action in decision making, and it is important to note that the decision tree will not issue the management with solutions. it does not help in solving the investment issues but assists the administration in determining the possible alternative at every point of choice (Lucidchart, 2018). The solution is important since it will create a high and expected monetary gain provided the information and the alternative is relevant to the decision.

The gains are considered together with the risks, and for example in the chemical company, the management have different opinions on risks hence they will reach different conclusions in the situations explained from the decision tree (Hwang, Choi Lee & Park, 2012). The people who participate in the decision making and supply of capital have different values of risk and uncertainty that might surround the decisions in different ways. When the issues are not recognised and dealt with, those who were involved in decision making must give a judgment and pertain to the situation.

The participants will have different effects from the investment problem and the decision making where some will benefit even as the project fails while others will lose as the project gains (Hwang, Choi Lee & Park, 2012). The decision tree will make the management to realise the possibility of a risk occurring and hence choose to apply multiple decisions that promote monetary gain.

In conclusion, the decision tree explains the relationship between the present plan and the future events. The chemical company should make the current decisions concerning the likely effect and the outcome of events which are uncertain. The management can use the decision tree to balance the need to capitalise on profit opportunities that can occur with the potential to react to future situations and events. Therefore, the decision tree allows the management to combine the analytical methods such as cash flow discount and the present techniques of value with the impact on future decisions.

Decision making and events for the company (SmartDraw, (2018))

https://www.smartdraw.com/decision-tree/decision-tree-maker.htm

https://www.lucidchart.com/pages/planning/decision-tree-examples

References

Hwang, J., Choi, Y. G., Lee, J. (Jay), & Park, J. (2012). Customer Segmentation Based on Dining Preferences in Full-Service Restaurants. Journal of Foodservice Business Research, 15(3), 226-246. https://doi.org/10.1080/15378020.2012.706180

Junkui Yao, F. J., & Jaafari, A. (2003). Combining Real Options and Decision Tree: An Integrative Approach for Project Investment Decisions and Risk Management. Journal of Structured & Project Finance, 9(3), 53-70. Retrieved from http://search.ebscohost.com/login.aspx?direct=true&db=bth&AN=11534521&site=ehost-live

Lucidchart, (2018). Decision Tree Maker. Retrieved from https://www.lucidchart.com/pages/planning/decision-tree-examples

Moore, H. (2010). The Business Tree : Growth Strategies and Tactics for Surviving and Thriving. Franklin Lakes, NJ: Career Press. Retrieved from http://search.ebscohost.com/login.aspx?direct=true&db=nlebk&AN=353803&site=ehost-live

SmartDraw, (2018). Decision Tree Maker. Retrieved from https://www.smartdraw.com/decision-tree/decision-tree-maker.htm

Thomas, A., & Chartered Institute of Marketing. (2012). Analysis and Decision (Vol. First edition). London: BPP Learning Media. Retrieved from http://search.ebscohost.com/login.aspx?direct=true&db=nlebk&AN=805649&site=ehost-live

Haynes, W. W. (2015). Pricing Decisions in Small Business. Lexington: The University Press of Kentucky. Retrieved from http://search.ebscohost.com/login.aspx?direct=true&db=nlebk&AN=938560&site=ehost-live